Order u/s 197(1) is quasi-judicial in nature and should be based on prescribed procedure, objective criteria and relevant material
Facts of the case:
- Petitioner, a company incorporated in the USA, filed an application on 30th April, 2019 u/s 197 of the Income Tax Act (the Act) seeking a NIL withholding tax (WHT) order or alternatively, WHT order @1.04% for Financial year (FY) 2019-20 for remittances received from Indian customers.
- In the past, Petitioner had been regularly obtaining from the Tax Department, lower WHT certificates u/s 197 @ 1.5% of the sum remitted. Delhi Bench of Income Tax Appellate Tribunal (ITAT) had upheld assessment orders for Assessment Year (AY) 2002-03 to 2006-07 confirming the attribution of income to Permanent Establishment (PE) @ 2.6% & effective tax rate 1.04% of the sums remitted in the past. Further, Hon’ble Delhi High Court had dismissed the Petitioners appeals & had confirmed the stand taken by ITAT.
- The Assessing Officer (AO) had initially prescribed lower WHT rate of 1.5% for FY 2019-20 which was increased to 5% on directions of CIT(IT), where he cited the non-furnishing of books of accounts & presence of PE in India as reasons behind the increase.
Held by the Hon’ble Delhi High Court:
- The first reason of constitution of PE for increase in TDS rate to 5% cannot be a cohent reason & secondly, reason of non-furnishing of account is not valid as the Petitioner was never asked by the AO to provide the books of accounts.
- The Hon’ble High Court placed reliance on Apex Court decision in case of Anirudhsinhji Karsansinhji Jadeja* wherein, it was held that if a statutory authority has been vested with jurisdiction, he has to exercise it according to its own discretion else it will be a case of failure to exercise discretion altogether.
Thus, the Hon’ble Delhi HC held that the subject petition was a text book example of a superior officer dictating to his subordinate what the decision should be.
- The decision was taken without valid basis (without quasi detailed reasons & without following prescribed procedure) and ignoring the relevant material that was called for and available on record. Further, the detailed reasons fixing TDS rate must be communicated to the applicant & must confirm to the notings of file and requirement of Section 197 of the Act.
- The Hon’ble Delhi HC placed reliance on Hon’ble Bombay HC decision in the case of Tata Teleservices (Maharashtra) Ltd** wherein it was held that there is an obligation upon the AO to grant the Nil/lower WHT certificate u/s 197, if the conditions specified therein are satisfied and the order passed under section 197 of the Act is an order which is a quasi-judicial order and must be supported by reasons.
Conclusion:
The present decision highlights the arbitrariness and non-application of minds at various levels of tax department for issuance of Section 197 certificate which vitiates the intention of legislature behind the introduction of Section 197. It would be a great achievement on the part of the tax authorities that they follow & implement the prescribed procedures outlined in the Act in right spirit as they had been introduced by the legislature to remove the hardship faced by the assesses.
* Anirudhsinhji Karsansinhji Jadeja v. State of Gujarat AIR 1995 SC 2390 (SC)
** Tata Teleservices (Maharashtra) Ltd v. Deputy Commissioner of Income Tax (TDS) [2018] 402 ITR 384 (Bom HC).
Bently Nevada LLC v. Income Tax Officer, Ward-(1)(2), International Taxation
